Inside the Market’s roundup of some of today’s key analyst actions
The sell-off in Rogers Communications Inc. (RCI-B-T) stock following the release of “disappointing” first-quarter results has been “overdone,” according to Desjardins Securities analyst Maher Yaghi.
Believing its below-average valuation is “unwarranted” given his expectation that the company will grow its earnings at or slightly above the industry average, Mr. Yaghi raised his rating for Rogers stock to “buy” from “hold.”
“Entering 2019, we were lukewarm on RCI shares as, at the time, the stock was trading at a premium to other companies in the sector, while in our view its fundamentals were similar to BCE’s,” said Mr. Yaghi in a research note released Wednesday. “Fast forward to today, the stock is now trading at a 0.6 times discount to BCE based on FY2 EV/EBITDA. So the question is: are RCI’s long-term fundamentals now weaker than BCE’s?
“Over the longer term, we conclude that this perceived weakness is likely transitory. RCI’s ARPU [average revenue per user] growth will likely be positive in 2019, and the recent weakness in subscriber loading likely reflects a change in the company’s strategy to focus on long-term income-producing customers rather than short-term loading outperformance. Finally, if one takes an even longer view, the company has shown significant resilience and a tendency to continue to gain its fair share of subscriber loading and consumer spend in the sector.”
In justifying his rating change, Mr. Yaghi emphasized Rogers’ recent valuation decline versus its large-cap peers.
“Since the beginning of 2019, RCI.B shares have shed 4 per cent, while BCE has gained 11 per cent, T [Telus] is up per cent and SJR.B [Shaw Communications] has increased 10 per cent,” he said. “Such a dichotomy in performance among Canadian large-cap telecom companies is unusual, especially when business fundamentals are very similar over the long term.
“On a forward EV/EBITDA basis, RCI.B was trading at a 0.4 times EV/EBITDA premium over its large-cap peers on the last day of 2018 but is now priced at a 0.4-times discount. This discount is the widest since mid-2015, when the company’s EBITDA growth rate was well below that of BCE and T. Although RCI reported 1Q19 results that did not meet expectations, we do not believe the miss was enough to conclude that the company’s 2019 EBITDA guidance is at risk. In addition, RCI maintains a higher-than-peer-average exposure to wireless, the segment that we believe commands the highest multiple in the Canadian telecom space given it has better prospects than wireline, media and data services. While we believe RCI is the most exposed to Freedom’s wireless inroads, the new entrant mostly targets lower-end customers, which generate smaller margins.”
Emphasizing “healthy” EBITDA growth and expressing optimism that its “horrible” first-quarter subscriber results an “outlier,” Mr. Yaghi maintained a 12-month target price of $79 for Rogers shares. The average target on the Street is $73.93, according to Bloomberg data.
“Yes, RCI reported weak 1Q results, and for a stock that was recently priced for perfection, the reaction by investors was swift,” he said. “We do not have a crystal ball, and we cannot be certain if these results will carry into 2Q. However, the bigger picture is that RCI’s assets and management team are strong, and the firm is well-positioned to continue to grow profitably. Hence, given the current undeserved and depressed valuation, we are upgrading RCI.”
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The odds of Shopify Inc.’s (SHOP-N, SHOP-T) 2020 top line exceeding US$2-billion improved with its “surprise” first-quarter results and guidance raise, according to Mackie Research analyst Nikhil Thadani.
“On what is now an expected quarterly revenue beat, SHOP shares closed up 8 per cent [on Tuesday],” he said. “Positive quarterly stock reactions have been somewhat muted since Q3/17 results in October 2017. SHOP’s stock performance [Tuesday] was all the more impressive on the heels of a more than 60-per-cent year-to-date performance in the stock (2.7 times NASDAQ year-to-date performance). Importantly, 2019 revenue guidance increase of $20-million exceeded the Q1 revenue beat of $10-million (at top end of range), which bodes well given the company’s track record of judiciously managing investor expectations. Q1 results also demonstrated inherent operating leverage in the model, albeit due to lower than expected brand related marketing spending, which could suggest future adjusted operating income could surprise to the upside as well.”
Before the bell on Tuesday, the Ottawa-based e-commerce platform reported quarterly revenue of US$321-million, up 50 per cent year-over-year and ahead of Mr. Thadani’s US$310-million forecast. Adjusted EBITDA of a loss of US$1.4-million also exceeded his expectations (a US$13-million loss).
“We believe the odds of SHOP’s 2020 top line exceeding $2-billion improved with Q1 results and the accompanying guidance raise, which likely has more upside room,” he said.
“We would be very surprised if 2020 revenue does not exceed $2-billion. Going into Q1 results, 2020 revenue consensus increased $20-million (2 times Q1/19 revenue beat & inline with 2019 guidance increase) from just ahead of Q4/18 results reported six weeks ago. Using the top end of 2019 revenue guidance, our 2020 revenue estimate implies 33-per-cent year-over-year revenue growth vs. 40 per cent year-over-year implied for 2019. SHOP will provide 2020 guidance in less than a year, but we expect the company’s international expansion, better than expected merchant additions, continued product roadmap reducing purchase friction) positions the company for continued revenue outperformance, as evidenced by 2019 guidance raise.”
Maintaining a “buy” rating for Shopify shares, Mr. Thadani hiked his target to US$280 from US$210. The average on the Street is US$248.07.
“SHOP trades at 12.5 times 2020 Sales, based on our modestly revised 2020 estimates,” the analyst said. “In effect, SHOP trades at lower multiple, given the company’s history of revenue outperformance. High growth SaaS names trade at 11 times 2020 Sales. Our revised $280 target, implies 14.5 times 2020 Sales, without accounting for potential upward revenue revisions. Market risk could provide opportunistic entry points on market volatility given markets’ strong year-to-date performance. We expect additional positive details around the company’s product roadmap at SHOP’s investor day in the summer.”
Elsewhere, Summit Insights analyst Jonathan Kees raised his target to US$280 from US$185 with a “buy” rating (unchanged).
Mr. Kees said: “Shopify (SHOP) reported strong 1Q19 (Mar) results that reflected better than expected growth despite a seasonally weak quarter. Greater Plus segment impact and more merchants added from international (MRR was at a record level) were major drivers of the topline beat, along with sequential gross margin (GM) improvement. Despite greater S&M planned for next two quarters due to increasing sales headcount and launch of a brand campaign along with increased R&D spending due to platform enhancements, we see continued topline traction from increasing Plus merchant count with their accompanying material boost to GMV as well as more merchant adds in general mainly from international expansion to offset the planned increases in opex dollars. In addition, we see the public cloud transition to benefit subscription segment’s GMs and greater contribution from higher GM components such as Shipping and Capital to benefit merchant segment GMs. They will have the effect of keeping GM at similar levels to 1Q’s GM high (last 12 months). Market conditions continue to be fragmented and greenfield, favorable to SHOP. All in all, we see topline and adjusted EPS beats ahead and raise our estimates.”
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Calling it a “titan of sustainability,” RBC Dominion Securities analyst Derek Spronck initiated coverage of Waste Management Inc. (WM-N) with a “sector perform” rating, believing it’s currently fairly priced.
“Waste Management's scale and cash flow profile positions it to deliver sustainable long-term earnings growth and shareholder value,” he said. “Current valuations are reflective of this positive dynamic over our forecast horizon, and as such, we see more limited near-term investment upside. However, the recently announced acquisition of Advanced Disposal offers upside optionality and we would look for dislocations in relative value to peers as an investment opportunity.”
Mr. Spronck set a target price of US$113 for shares of the Houston-based large-cap company. The average on the Street is US$110.58.
“What sets Waste Management apart is its industry leading scale and cash flow generation on an absolute basis,” he said. “We see this scale providing key advantages, including: 1) lower financial variance due to broad-based operational diversification; 2) nationally recognized brand offering corporate partnership opportunities; 3) flexibility to invest in more novel technologies and potential first mover advantages; and 4) capacity to absorb larger acquisitions and/or invest in new product categories. Accordingly, we see WM's scale as a key investment differentiation and part of the long-term value proposition for investors.”
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In a separate note, Mr. Spronck also initiated coverage of Republic Services Inc. (RSG-N), a Phoenix-based company, with a “sector perform” rating.
“Republic Services has a large landfill base with 63 years of capacity that is complimented with a collection footprint in attractive markets and a young and modern fleet,” he said. “Management is leveraging this attractive asset base to deliver consistent earnings growth and long-term shareholder returns. Over our forecast horizon to 2020, we believe the shares are near full value.”
His target of US$87 tops the consensus of US$83.60.
“We see Republic as favorably positioned within the environmental services industry with attractive assets in attractive markets,” the analyst said. “We believe this positive dynamic is appropriately priced in the near term, and see fewer catalysts that could lead to a further positive re-rating in valuation multiples. Accordingly, we apply an EV/EBITDA multiple of 11.5 times on our 2020 estimates, which aligns with a 4.7-per-cent FCF [free cash flow] yield and relatively in-line with current forward valuations. This gets us to our $87 price target, implying an all-in potential return of 7 per cent and the basis of our Sector Perform rating.”
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Seeing it “attractively” valued following recent weakness, Credit Suisse analyst William Featherston raised his rating for ConocoPhillips (COP-N) to “outperform” from “neutral” following Tuesday’s release of better-than-anticipated first-quarter financial results.
“COP has underperformed peers by 30 per cent year-to-date driven by: 1) the unwind of winners from last year that occurred in January/February, & 2) concern it makes a large, corporate acquisition,” said the analyst. “But given management’s comments today on the ‘very high’ bar a corporate deal must clear for it to pursue (focused on full-cycle returns) & it already has 16 BBoe of resource with a cost of supply less-than $30 per barrel (no need to replenish inventory), we think the aforementioned concerns are overdone.
“Meanwhile, COP has de-rated more than 2.0 turns on 2020 EV/DACF [enterprise value to debt-adjusted cash flow] this year (largest among large-cap E&Ps) & now trades at a 0.5-times discount to the group (as well as a 10-per-cent FCF yield, twice that of peers) despite continuing to execute on its financially disciplined, returns-focused strategy. Thus, we are upgrading COP to Outperform (from Neutral).”
He maintained a US$75 target, which falls below the consensus of US$79.22.
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Raymond James analyst Jeremy McCrea lowered his target price for shares of Arc Resources Ltd. (ARX-T) after reducing his net asset value assumption to “scale back undrilled future ‘gassier’ locations.”
“Given the continued volatility in AECO prices, we believe investors have little desire to pay up for these future locations today (and for the foreseeable future),” he said.
On Tuesday after market close, the Calgary-based company reported better-than-anticipated production for the first quarter of 139,100 barrels of oil equivalent per day, exceeding Mr. McCrea’s 138,500 barrel forecast. However, fund flow of 53 cents per share fell 4 cents shy of his estimate, due largely to lower realized pricing, a higher gas mix and increased expenses.
“In real estate, most investors wants to buy in the ‘up-and-coming neighborhood,’” the analyst said. “Discounted valuations but improving dynamics. ARX is similar. A high percentage of production that remains gas-weighted (and undesired) but significant future potential in liquids-rich drilling. Unfortunately, development and change is never as fast as anyone typically likes, but often one day, these neighborhoods (and companies) are ultimately recognized by the community with the patient investor rewarded. With liquids growth expected at a 15 per cent-plus CAGR [compound annual growth rate] for next next three years, top tier balance sheet, and well economics and a discounted valuation (ARC’s year-to-date share price underperformance (up 5 per cent Vs. XEG: up 15 per cent), we believe there is some catch-up to play. Although Q1 results are mostly neutral, we think a reiteration of the 3-year outlook and confirmation lower Montney remains a focus (higher liquids) should nevertheless be encouraging.”
Maintaining a “strong buy” recommendation for Arc, he lowered his target to $16 from $17. The average on the Street is currently $13.36.
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Apple Inc.'s (AAPL-Q) quarterly results and outlook “were clearly better than expected,” according to Citi analyst Jim Suva.
“It is no surprise that we get a lot of pushback on our Buy rating on Apple given 1) its large market cap, 2) iPhone sales have entered negative growth 3) Android has more market share and less expensive average selling points and 4) investors feel innovation at Apple has been lacking,” said Mr. Suva.
In a research note released Wednesday, he pointed to five factors which lead him to believe the U.S. tech giant’s trillion-dollar market cap “can go higher.”
They are:
- “Increased services will gradually be an increasing part of Apple user lives and Apple highlighted its users increased literally in all products and geographies.”
- Expansion of its footprint into developing countries, pointing to opportunities in India, in particular.
- Both the “attractiveness” and convenience of Apple Pay, noting the adoption by more mass transit systems will “ause consumers to become much more familiar with Apple Pay for normal transactions and greatly helps with adoption.”
- “Tremendous” R&D, resulting in innovation of new products and services.
- Its valuation and capital returns. He said: “Apple trades at 10-20-per-cent discount to the market and has a dividend yield of 2 per cent and a $75 billion authorized stock buy back all of which create valuation support. As services grow which have gross margins in the 60-per-cent range compared to hardware in the 30-per-cent range one can argue that Apple’s cash flow and valuation multiple could expand in the future.”
Though he raised his earnings expectations for 2019 and 2020, Mr. Suva maintained a “buy” rating and US$220 target for Apple shares. The consensus on the Street is US$212.80.
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In other analyst actions:
Believing its merger catalysts are “played out,” Bernstein analyst Bob Brackett downgraded Encana Corp. (ECA-N, ECA-T) to “market perform” from “outperform” with a target of US$8, down from US$9.25. The average on the Street is US$10.21.
Wolfe Research analyst Rod Lache downgraded Magna International Inc. (MG-T, MGA-N) to “peer perform” from “outperform.”
TD Securities analyst Jonathan Kelcher initiated coverage of European Residential Real Estate Investment Trust (ERE-UN-X) with a “buy” rating and $5 target, which exceeds the consensus by 6 cents.
David Leeder